Unemployment and Productivity in the Long Run: The Role of Macroeconomic Volatility

MEF Working Paper No. 5

44 Pages Posted: 10 May 2011

See all articles by Pierpaolo Benigno

Pierpaolo Benigno

Luiss Guido Carli University; Einaudi Institute for Economics and Finance (EIEF)

Luca A. Ricci

International Monetary Fund (IMF) - Research Department

Paolo Surico

London Business School - Department of Economics; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 4 versions of this paper

Date Written: March 1, 2011

Abstract

We propose a theory of low-frequency movements in unemployment based on downward real wage rigidities. The theory generates two main predictions: long-run unemployment increases with (i) a fall in long-run productivity growth and (ii) a rise in the variance of productivity growth. Evidence based on U.S. time series and on an international panel strongly supports these predictions. The empirical specifications featuring the variance of productivity growth can account for two U.S. episodes which a linear model based only on long-run productivity growth cannot fully explain. These are the decline in long-run unemployment over the 1980s and its rise during the late 2000s.

Keywords: Unemployment, Productivity growth, Volatility

JEL Classification: E0, E20, E40

Suggested Citation

Benigno, Pierpaolo and Ricci, Luca Antonio and Surico, Paolo, Unemployment and Productivity in the Long Run: The Role of Macroeconomic Volatility (March 1, 2011). MEF Working Paper No. 5. Available at SSRN: https://ssrn.com/abstract=1836262

Pierpaolo Benigno (Contact Author)

Luiss Guido Carli University

Viale Romania 32
Rome, Roma 00197
Italy

Einaudi Institute for Economics and Finance (EIEF) ( email )

Via Due Macelli, 73
Rome, 00187
Italy

Luca Antonio Ricci

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-6007 (Phone)
202-623-4072 (Fax)

Paolo Surico

London Business School - Department of Economics ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

HOME PAGE: http://sites.google.com/site/paolosurico

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

HOME PAGE: http://sites.google.com/site/paolosurico

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